WISDOMTREE- Weekly commentary from Professor Jeremy J. Siegel (06/26/2023) :
Last week was quiet on the economic data side, but it was the third week in a row with elevated jobless claims. There is no question the trend in jobless claims ratcheted up. I am watching these weekly claims reports closely to confirm an increasing chance of a negative jobs report this Friday. I’ll caution you against evaluating ‘continuing’ claims which contains seasonal adjustments that distort the real underlying picture. The weekly claims data is what is important to me—and that is elevated.
A negative jobs report will impact the Fed—particularly as we come into the election. While inflation is clearly topical and driving headlines, I expect the Fed’s dual mandate to support economic growth will come into greater focus. The S&P Purchasing Managers Index (PMI) data came in, and while the service sector was ok, manufacturing data has come back down to its December low.
I’ll say a few words about Powell’s testimony in front of Congress. There were no new economic or inflation reports between the Fed decision and press conference and last week’s commentary, so there was nothing that notable in his testimony. Powell repeated that the Federal Open Market Committee (FOMC) believes two more hikes could be appropriate and he is on board with that view. Of course, his views and others are subject to change with new data that comes in.
This week we will get more economic reports. The Personal Consumption Expenditure (PCE) data does not contain much new information—most of it can be derived from the Consumer Price Index (CPI) and Producer Price Index (PPI) releases that are already known. As we have noted, one factor driving them artificially higher is stale shelter inflation and we get another Case-Shiller housing index release on Tuesday. Given rising home prices and higher mortgage rates, the interest burden and carrying cost of the average house is up three times from prior to the pandemic. This is one of sharpest rises in history and will ultimately weigh on consumer spending.
We get new money supply data soon and it looks like we will have a twelfth consecutive monthly decline. This is another sign inflationary pressures are trending in the right direction and should convince the Fed to continue the pause and assess the cumulative tightening already in the system.
One of the big topics for the economy I am also watching is the impact of artificial intelligence (AI) and the resulting impact on economic growth and productivity trends. I participated in WisdomTree’s AI focused conference call last week—and our latest “Behind the Markets” podcast continued the AI discussion with my fellow Wharton professor Daniel Rock. A replay of our conference call will be published later this week. But I’ll give readers a preview of those calls now.
I don’t love the word ‘artificial’ intelligence in describing AI capabilities as it seems to imply it is ‘artificial’. Machine intelligence can be superior to human intelligence in many domains. The question I am focused on: is the diffusion of AI technology in speed and scope faster than other technology breakthroughs?
While ChatGPT got to 100s of million users quicker than any technology of note, everyone had access to a phone and ability to download—so this is just a sign of the times for something with broad based appeal. My sense—and this was echoed by Professor Rock—that it could take quite a long time for the ultimate impact of AI technology to fully diffuse into the economy.
There have been comments that AI could reduce 40% of jobs, but Professor Rock’s research on what jobs have exposure to AI does not anticipate such a large-scale reduction in employment. Certainly, some tasks and professions in data automation and processing, such as financial services like insurance processing or security trading, have elements that will be improved considerably with AI technology.
But for the economy at large, technology is deflationary—as companies make investments to offset their largest input cost, labor. Profits could go up over the short-run while firms get more output from workers with less cost—but overtime competition could also force down margins. Consumers might benefit the most from some of these technological developments—with lower prices and better services that do not always fully translate to better corporate profits.
A short story. One of the only jobs that seems to have been fully automated in the post-war era is the elevator operator. But when elevator operators were first replaced with buttons, people were afraid to ride the elevator without the human operator. This might be similar fears with self-driving cars, which we are told by Elon Musk that technology will be ready later this year. But he has said that in the past. There always seems residual issues to work out that extend the implementation timelines.